How Unemployment Works for Employers 

Unemployment benefits serve as an important safety net for employees who lose their jobs through no fault of their own. For employers, however, unemployment insurance is more than just a government program. It is a financial responsibility and a compliance obligation that directly impacts your bottom line. 

If you are a small business owner or human resources (HR) leader, understanding how unemployment works from the employer side can help you control costs, reduce risk, and make more informed workforce decisions. 

What Is Unemployment Insurance? 

Unemployment insurance is a joint federal and state program that provides temporary income to eligible employees who are no longer employed. Most employers are required to contribute to this system through payroll taxes. 

These employer-paid taxes fund unemployment benefits for eligible workers. While employees receive benefit payments, employers are responsible for funding the system and participating in the claims process as needed. 

Who Pays for Unemployment? 

In most cases, employers pay both federal and state unemployment taxes. 

Federal Unemployment Tax 

The Federal Unemployment Tax Act, commonly referred to as FUTA, requires employers to pay a federal unemployment tax on a portion of employee wages. This tax helps fund oversight of state unemployment programs and loans to states when needed. 

State Unemployment Tax 

In addition to federal taxes, employers must also pay state unemployment taxes. State unemployment tax rates vary and are based on several factors, including your company’s industry and claims history. 

One important concept employers should understand is experience rating. Your state unemployment tax rate is influenced by the number of unemployment claims filed against your business. The more claims that are approved and paid out, the more likely your rate will increase over time. 

For growing businesses, this can significantly affect overall payroll costs. 

What Happens When a Former Employee Files a Claim? 

When a former employee files for unemployment benefits, the state agency will notify you. Employers are given the opportunity to provide information about the separation. 

The process typically includes: 

1. A notice of claim from the state 
2. A request for separation details 
3. A determination issued by the state 
4. The option to appeal if you disagree with the decision 

Your response plays an important role in the determination process. If an employee was terminated for documented misconduct or voluntarily resigned, providing thorough and timely documentation can protect your business from unnecessary charges. 

Failing to respond or providing incomplete information can result in higher unemployment costs. 

How Employers Can Reduce Unemployment Costs 

While unemployment taxes are required, employers can take proactive steps to better manage their exposure. 

Maintain Strong Documentation 

Keep accurate records of performance issues, disciplinary actions, attendance violations, and policy acknowledgments. Clear documentation supports your position if a claim arises. 

Implement Clear Workplace Policies 

An up-to-date employee handbook with clearly communicated policies sets expectations and provides consistency in how issues are handled. 

Train Managers Properly 

Supervisors should understand how to document employee performance concerns and follow proper termination procedures. Consistency and compliance reduce risk. 

Focus on Retention 

Reducing turnover through better hiring practices, employee engagement, and performance management can help minimize claims and stabilize your unemployment tax rate. 

How GMS Supports Employers with Unemployment Management 

Managing unemployment claims and tax rates can quickly become time-consuming and complex, especially for small to midsize businesses without dedicated HR teams. 

Group Management Services (GMS) helps businesses: 

1. Monitor and manage unemployment claims 
2. Ensure timely and accurate responses to state agencies 
3. Strengthen documentation and HR practices 
4. Navigate compliance requirements across multiple states 
5. Control unemployment tax exposure 

Unemployment insurance is a necessary part of employing a workforce, but it does not have to be unpredictable or overwhelming. With the right processes in place and the right partner supporting you, unemployment can become a manageable component of your overall workforce strategy. 

If you want to learn how GMS can help you take control of unemployment costs and strengthen your HR foundation, contact us today.